Kvint Russia

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The Russian Capital MarketDr. Vladimir Kvint

Washington, DC

January 25, 2008

The Bretton Woods Committee

Symposium Strengthening Capital Markets in Emerging Market Countries


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Lack of clear definition- pervasiveness ofmisleading statistics and studies

Even in the IMF and the Economist Intelligence

Unit, the list of countries considered to beEmerging Markets is not consistent

Statistics not comparable, conclusions not accurate

Ignores the fundamentally different needs ofEmerging Market, Developing andUnderdeveloped countries

Dr. Vladimir Kvint, 2008January 25, 2008

Emerging Market Definition


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Emerging Market Definition

a society transitioning from a dictatorshipto a free market oriented economy, withincreasing economic freedom, gradual

integration within the Global Marketplace,an expanding middle class, improvingstandards of living, social stability and

tolerance, as well as an increase incooperation with multilateral institutions.



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Role of Emerging Markets in theGlobal Marketplace (January 1, 2008)

81 countries

Territory: 46.45% Population: 68.32%

Gross World Product: 49.67%

Foreign Direct Investment inflow: 40%



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Impact of Russias National Ideas

on the Capital Market

Power of the Territory

Prevention of disintegration

Russia as the Third Rome Ruler worship

The Superior is always right

Conspiracy Obsession Extensive not Intensive Economy



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The Political Environment of theRussian Capital Market

From Communist Dictatorship to Yeltsins Anarchy toPutins Vertical of Power (1989-2006)

Western Misconceptions about Russias pseudo-advocatesof the free market (1989-2001)

Liberalization of prices before Demonopolization (1992-93) Pseudo-privatization and the creation of the economicroots of corruption (1992-1995)

The Crash of Russias romantic image of capitalism andAmericanism (1992-1995)

Regional Decentralization of Russia- Governors asGodfathers (1995-2002) Corruption and Nepotism as a philosophy and image of

Russian Business



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Historical Developments of theCapital Market

1990

Birth of Russian stock market: the USSRgovernment issues two decrees:

Regarding Share Holding Companies Regarding Valuable Papers

First shares issued and actually sold:

shares of Russian commodity exchanges,accounting for 80 per cent of all sharesuntil November 1991.



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Historical Development

1992

Creation of The Moscow Interbank CurrencyExchange, the Moscow Central Currency

Exchange, the Russian Commodity Exchange,St. Petersburg Stock Exchange and the South-Ural Stock Exchange

1993

Beginning of the sale of shares of privatizingcompanies

Beginning of the state bond market- GKO



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1994

October, Black Tuesday- the dollar exchangerate collapses, cutting the purchasing powerof the Russian Ruble in half.

first currency speculation in the Russian market

MIBOR (sellers rate of deposit) and MIBID

(buyers rate) are adopted by the 9 biggest

banks.



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Russian Stock Market, 1994

20%

32%

29%

12%

5%

GKO

Privatizing companies

Bank shares

Vouchers

Other securities andbonds

January 25, 2008 Dr. Vladimir Kvint, 2008


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1996

Establishment of the stock, currency,derivative, and interbank credit markets.

The biggest of these was the currencymarket.

Daily interbank credits reached the value of

300 billion rubles. Due to the high risk of this market,

securitization takes off



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1998

Destabilization of the Russian stockmarket , following the Asian crisis.

August 17- following payment crisis,Russian government declares Rubledefault and a moratorium on private andstate obligations to foreign creditors



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10 years later

January 21, 2008

Futures for Brent oil fall below $88

Shares of Oil companies fall between 5.27%

(Rosneft) and 8.7% (Surgutneftegas) Capitalization of Vneshtorg Bank decline by

6.33% and Sberbank by 7.65%

Telecom sector declines by an average of 7.5%

Caused by uncertainty of US market andcomplicated by closing of NYSE (US NationalHoliday)



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Russian Stock Market, 01.01.2007

73%

15%

5%

3%

4%GKO

Corporate Bonds

Company Shares

Municpal and StateBonds

Eurobonds andothers



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Capitalization Growth Rates, 2007

US

Germany

EU

Brazil

Russia

India

China*

BRIC

World

0

20

40

60

80

100

120

140

160

*including Hong Kong



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Capitalization of the Global Marketplace,

January 2008

38.5%

12.78%

22.17%

23.6%

2.9

United States

Global Emerging

Market (withoutRussia)European Union(without EMCs)*

Japan and

Canada

Russia



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Capitalization in Russia

2007

For the first time since 2000, Russiaexperienced a sluggish growth of capitalization

and high volatility. 300 new companies went public bringing an

additional $121 billion. Only in December, 15companies went public with a total market valueof $924 billion.



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Capitalization

2008

Total capitalization of the Russian market: $1.463 trillion.

Since 2003, market capitalization increased by a

factor of ten. Contrary to popular opinion, the market capitalization of

the oil and gas sector is a little lower (by $6 billion) thancapitalization of all other publicly traded companies.

The 100 biggest publicly traded companies of Russiaaccount for 92.12% of the total market capitalization



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Quantitative Evaluation of theRussian Capital Market, 2008

Out of 85,489 emitters in Russia, only 482 (0.56per cent) have a presence in organized markets

95 % of market transactions are related to only

3% of available company shares Total face value of corporate shares on themarket is 1,128.15 billion rubles increased by 30% in 2007

The percentage of transactions on stockmarkets relative to total transactions hassurpassed 75%



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Unique Characteristics of the RussianStock Market

An emitter can have a presence at several differentexchanges simultaneously

Extremely high rate of growth- 2005: 150%

2006: 200%

2007: 10% (six months) High concentration of capitalization in terms of

emitters and industries Gazprom: 25.5% of the market.

The ten major companies, (Norilsk Nickel, Lukoil, MTS Telecom,

and Sberbank, among others): more than 70% Three industries- Energy, Financial and Metallurgy: 90%

Increasing role of the financial sector (3.5 times, 2007)

Declining role of depository receipts of Russiancompanies on foreign stock exchanges (since 2004)



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Russian Capital Market Trends 2008

Increasing debt of individuals and companies willhave a substantial influence on the financial andbanking sectors every Russian owes the banking sector of about $1,000

Delinquent debt per person is 1,500 rubles (roughly $60) Lower credit discipline will negatively influence the credit debt

market

Rapid development of banking sector despitedecreasing number of banks

Assets, capital and private bank accounts have increased by30-40% annually (7 times faster than GDP)



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Status quo of Russian BankingSector, 2008

1,243 registered banks Total registered capital of 731.74 billion rubles

1,092 banks licensed to conduct banking transactions

199 banks licensed to operate with precious metals

906 banks licensed to operate with foreign currency

202 banks with foreign capital 63 banks (with 169 branches) that consist of 100 per cent

foreign capital

23 banks with more than 50 per cent foreign capital 909 banks with governmentally insured accounts

Since 2003, 1,419 bank licenses were revoked

More than 90 per cent of all transactions (60 per cent of in

terms of value) are conducted via internet tradingJanuary 25, 2008 Dr. Vladimir Kvint, 2008


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23January 25, 2008 Dr. Vladimir Kvint, 2008

Selected Financial Indicators of Russia as % of

GDP

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007

M2 Bank Assets Domestic Credit Deposits Household Deposits


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Number of Banks in Russia

0

500

1000

1500

2000

2500

2000 2001 2002 2003 2004 2005 2006 2007

Prepared by Dr. Kvint for BWC, on the base of statistics from the Central Bank of Russia, January 24, 2008


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M2 Growth Rate (%) in BRIC

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007

Brazil Russia India China



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26Prepared by Dr. Kvint for BWC, on the base of statistics from the Central Bank of Russia, January 24, 2008

Annual Trading Volume, Total Turnover of the MICEX (blns US $)

0

500

1000

1500

2000

2500

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006


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27Prepared by Dr. Kvint for BWC, on the base of statistics from the Central Bank of Russia, January 24, 2008

Annual Trading Volume, Derivative Market of the MICEX

(blns denominated rubles)

0100

200300

400

500600

700800

900

1000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006


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International Reserves of Russia (Blns US $)

0

50100

150

200

250

300350

400

450

500

2000 2001 2002 2003 2004 2005 2006 2007



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Gold Reserves of Russia (Mlns US $)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2000 2001 2002 2003 2004 2005 2006 2007



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